solo stove(DTC) - 2023 Q2 - Quarterly Report

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Forward-Looking Statements Disclosure The company's forward-looking statements are predictions based on current expectations, subject to risks, and will not be publicly updated unless legally required - Forward-looking statements are based on current expectations and projections, but involve known and unknown risks, uncertainties, and other important factors that may cause actual results to differ materially[10][11] - Key risks include managing future growth, market expansion, brand strength, customer acquisition/retention, product quality, competitive market, business interruptions, international operations, supplier issues, and stockholder influence[11] - The company does not plan to publicly update or revise any forward-looking statements unless required by applicable law[12] WHERE YOU CAN FIND MORE INFORMATION Availability of Company Information The company uses its investor relations website and social media for material information, with SEC filings available online - The company utilizes its investor relations website (https://investors.solobrands.com) and certain social media channels (Twitter, Facebook, LinkedIn) for distributing material information and complying with Regulation FD[14] - All SEC filings, including 10-K, 10-Q, and 8-K reports, are available free of charge on the SEC's website (www.sec.gov) and the company's investor relations website[15] PART I. FINANCIAL INFORMATION Item 1. Unaudited Financial Statements Unaudited consolidated financial statements, including balance sheets, income, cash flows, and equity, are presented with detailed accounting notes Consolidated Balance Sheets Total assets increased to $881.2 million by June 30, 2023, driven by cash, with liabilities and equity also rising Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | % Change | | :-------------------------------- | :------------ | :---------------- | :----- | :------- | | Cash and cash equivalents | $60,603 | $23,293 | $37,310 | 160.2% | | Total current assets | $211,697 | $195,098 | $16,599 | 8.5% | | Total assets | $881,166 | $862,347 | $18,819 | 2.2% | | Total current liabilities | $68,238 | $67,008 | $1,230 | 1.8% | | Long-term debt, net | $136,313 | $108,383 | $27,930 | 25.8% | | Total liabilities and equity | $881,166 | $862,347 | $18,819 | 2.2% | | Total equity | $583,145 | $574,997 | $8,148 | 1.4% | Consolidated Statements of Operations and Comprehensive Income (Loss) Net sales decreased by 3.7% for Q2 2023, but net income significantly improved to $11.5 million due to no impairment charges Consolidated Statements of Operations Highlights (in thousands, except per unit data) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net sales | $130,927 | $136,019 | $219,134 | $218,222 | | Gross Profit | $83,071 | $86,676 | $137,474 | $135,529 | | Income (loss) from operations | $11,066 | $(19,942) | $14,264 | $(23,168) | | Net income (loss) | $11,514 | $(19,873) | $12,447 | $(23,108) | | Net income (loss) attributable to Solo Brands, Inc. | $7,424 | $(12,039) | $8,348 | $(14,074) | | Basic EPS (Class A common stock) | $0.12 | $(0.19) | $0.13 | $(0.22) | | Diluted EPS (Class A common stock) | $0.12 | $(0.19) | $0.13 | $(0.22) | - Net income significantly improved for both the three and six months ended June 30, 2023, primarily due to the absence of $30.6 million in impairment charges incurred in the prior year[21] Consolidated Statements of Cash Flows Operating cash flow significantly improved to $51.8 million for H1 2023, driven by net income and reduced inventory Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $51,795 | $(11,912) | | Investing activities | $(8,887) | $(5,356) | | Financing activities | $(5,785) | $19,012 | | Net change in cash and cash equivalents | $37,310 | $1,627 | | Cash and cash equivalents, end of period | $60,603 | $26,728 | - Operating cash flows increased by $63.7 million year-over-year, primarily due to a $50.9 million decline in cash usage from working capital changes (e.g., reduced inventory purchases) and a $12.8 million decline in cash usage from changes in net income[118][122] - Cash used in financing activities increased by $24.8 million, mainly due to a $28.5 million increase in Class A common stock repurchases, partially offset by a $3.8 million decrease in net debt repayments[119] Consolidated Statement of Equity (June 30, 2023) Total equity increased to $583.1 million by June 30, 2023, influenced by net income and equity compensation, offset by repurchases Equity Changes (Six Months Ended June 30, 2023, in thousands) | Item | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2022 | $574,997 | | Net income (loss) | $12,447 | | Equity-based compensation | $11,264 | | Common stock repurchase | $(8,591) | | Treasury stock retirement | $0 | | Balance at June 30, 2023 | $583,145 | Consolidated Statement of Equity (June 30, 2022) Total equity decreased to $554.7 million by June 30, 2022, primarily due to a net loss and tax distributions Equity Changes (Six Months Ended June 30, 2022, in thousands) | Item | Amount | | :-------------------------------- | :----- | | Balance at December 31, 2021 | $574,171 | | Net income (loss) | $(23,108) | | Equity-based compensation | $7,864 | | Tax distributions to non-controlling interests | $(4,541) | | Balance at June 30, 2022 | $554,702 | Notes to the Unaudited Consolidated Financial Statements Detailed notes provide context for financial statements, covering accounting policies, revenue, acquisitions, inventory, debt, and equity compensation NOTE 1 – Significant Accounting Policies This note details accounting policies, estimates, and the adoption of new pronouncements, with no material financial impact - The company adopted ASU 2016-13 (Credit Losses) on January 1, 2023, using a modified retrospective approach, with no material impact on consolidated financial statements[38] - ASU 2020-04 (Reference Rate Reform) adoption and related modification of credit facilities (replacing LIBOR with SOFR) did not have a significant impact[39] - ASU 2021-08 (Business Combinations) is effective for annual periods beginning after December 15, 2023, and its impact will depend on future acquisitions[40] NOTE 2 – Revenue Net sales show a 14.2% decrease in DTC but a 57.0% increase in wholesale for Q2 2023, indicating a channel shift Net Sales by Channel (in thousands) | Channel | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change (YoY) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | % Change (YoY) | | :---------------- | :--------------------------- | :--------------------------- | :------------- | :--------------------------- | :--------------------------- | :------------- | | Direct-to-consumer | $99,650 | $116,096 | (14.2)% | $154,400 | $176,326 | (12.4)% | | Wholesale | $31,277 | $19,923 | 57.0% | $64,734 | $41,896 | 54.5% | | Total Net Sales | $130,927 | $136,019 | (3.7)% | $219,134 | $218,222 | 0.4% | NOTE 3 – Acquisitions Acquired Sconberg LLC (TerraFlame) for $13.2 million on May 1, 2023, expanding brand and market share - Acquired Sconberg LLC (TerraFlame) on May 1, 2023, for $13.2 million, consisting of $5.5 million cash and $7.7 million in contingent consideration[45] - The acquisition was made to increase brand and market share in the outdoor activities industry and penetrate the indoor fire and scent industry[45] - Purchase consideration was allocated to $5.5 million intangible assets, $4.5 million property, plant and equipment, and $2.2 million goodwill[45] NOTE 4 – Inventory Inventory decreased to $113.7 million by June 30, 2023, mainly due to reduced finished products Inventory Composition (in thousands) | Inventory Type | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Finished products on hand | $95,456 | $112,126 | | Finished products in transit | $14,792 | $16,589 | | Raw materials | $3,409 | $4,275 | | Total Inventory | $113,657 | $132,990 | NOTE 5 – Property and Equipment, net Property and equipment, net, increased to $20.7 million by June 30, 2023, driven by machinery and new assets Property and Equipment, Net (in thousands) | Asset Category | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Machinery | $12,235 | $8,940 | | Leasehold improvements | $7,960 | $6,959 | | Buildings | $1,494 | $0 | | Land | $996 | $0 | | Total Property and equipment, net | $20,704 | $15,166 | - Depreciation expense for the six months ended June 30, 2023, was $2.4 million, up from $1.5 million in the prior year[49] NOTE 6 – Goodwill and Intangible Assets, net Goodwill increased to $384.9 million due to acquisitions, while intangible assets slightly decreased Goodwill and Intangible Assets (in thousands) | Asset Category | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Goodwill | $384,896 | $382,658 | | Intangible assets, net | $229,979 | $234,632 | - Goodwill increased by $2.2 million due to acquisitions during the period[50] - Amortization expense for intangible assets was $10.5 million for both the six months ended June 30, 2023, and 2022[51] NOTE 7 – Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $45.6 million, driven by marketing accruals and contingent consideration Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--------- | :------------ | :---------------- | | Inventory | $8,970 | $7,543 | | Leases | $7,507 | $6,889 | | Payroll | $4,353 | $6,999 | | Marketing | $3,676 | $451 | | Contingent consideration | $2,617 | $0 | | Total Accrued expenses and other current liabilities | $45,643 | $43,377 | NOTE 8 – Long-Term Debt, Net Long-term debt, net, increased to $136.3 million due to higher revolving credit facility borrowings, with compliance maintained Long-Term Debt, Net (in thousands) | Debt Type | Weighted-Average Interest Rate (June 30, 2023) | June 30, 2023 | December 31, 2022 | | :---------- | :--------------------------------------------- | :------------ | :---------------- | | Term loan | 6.37% | $93,750 | $96,250 | | Revolving credit facility | 6.41% | $50,000 | $20,000 | | Total long-term debt, net | | $136,313 | $108,383 | - The company was in compliance with all covenants under all credit arrangements as of June 30, 2023[54] NOTE 9 – Leases Lease assets and liabilities remained stable, but total lease expense increased to $5.3 million for H1 2023 Lease Components (in thousands) | Lease Component | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :---------------- | | Operating lease right-of-use assets, net | $33,329 | $34,259 | | Total operating lease liabilities | $35,133 | $36,022 | Lease Expense (in thousands) | Expense Type | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease right-of-use expense | $2,021 | $1,709 | $3,982 | $3,030 | | Variable and short-term lease expense | $691 | $130 | $1,300 | $611 | | Total lease expense | $2,712 | $1,839 | $5,282 | $3,641 | NOTE 10 – Equity-Based Compensation Equity-based compensation expense increased to $9.8 million for H1 2023, driven by performance stock units Equity-Based Compensation Expense (in thousands) | Award Type | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Common units | $3,221 | $3,428 | $6,373 | $6,873 | | Restricted stock units | $966 | $794 | $1,928 | $1,608 | | Performance stock units | $592 | $0 | $1,201 | $0 | | Stock options | $177 | $198 | $248 | $376 | | Employee stock purchase plan | $52 | $30 | $52 | $30 | | Total equity-based compensation | $5,008 | $4,450 | $9,802 | $8,887 | NOTE 11 – Income Taxes Effective income tax rate significantly increased to 19.4% for H1 2023 due to the absence of prior year's impairment-related tax benefit - Effective income tax rate for the three months ended June 30, 2023, was 18.9%, up from 8.4% in 2022[63] - Effective income tax rate for the six months ended June 30, 2023, was 19.4%, up from 10.5% in 2022[63] - The increase in tax rate and expense was primarily due to a discrete tax benefit related to $30.6 million impairment charges in 2022 that did not recur in 2023[63][64] - The company received a one-time refund payment of $5.1 million related to COVID-19 era employment tax benefits during the three months ended June 30, 2023[70] NOTE 12 – Net Income (Loss) Per Share Basic and diluted net income per Class A common stock significantly improved, turning positive for H1 2023 Net Income (Loss) Per Class A Common Stock | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to Solo Brands, Inc. | $7,424 | $(12,039) | $8,348 | $(14,074) | | Basic EPS | $0.12 | $(0.19) | $0.13 | $(0.22) | | Diluted EPS | $0.12 | $(0.19) | $0.13 | $(0.22) | NOTE 13 – Equity The company repurchased and retired 5,605,509 Class A common shares for $28.0 million in Q2 2023 - The Board of Directors approved and completed the repurchase of 5,605,509 shares of Class A common stock for $28.0 million during the three months ended June 30, 2023[73] - These repurchased shares were subsequently retired, decreasing the authorized Class A common stock from 475,000,000 to 469,394,491 shares[73][74] NOTE 14 – Subsequent Events Post-period, the company acquired IcyBreeze Cooling for $30.0 million and repurchased 627,286 Class A common shares - Acquired IcyBreeze Cooling LLC for $30.0 million cash on July 1, 2023, with purchase accounting incomplete but not anticipated to have a material impact on 2023 results[76] - Repurchased and retired an additional 627,286 shares of Class A common stock for $3.1 million in July 2023[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, operational drivers, strategic outlook, and macroeconomic impacts, detailing changes in sales, profit, and liquidity Overview Solo Brands operates premium brands via an omni-channel model, monitoring customer metrics to drive long-term value - Solo Brands operates premium brands through an omni-channel distribution model (e-commerce, wholesale, physical retail)[80] Key Performance Indicators (as of June 30, 2023) | Indicator | Value | YoY Growth | | :---------------------- | :------ | :--------- | | Total customers | 4.1 million | 27.2% | | Total email subscribers | 5.9 million | 24.9% | | Repeat purchase rate (Q2 2023) | 45.2% | N/A | - Net sales decreased by 3.7% for Q2 2023, driven by lower DTC sales (higher demand for lower-priced items) offset by strong wholesale growth[82] - Net income improved significantly to $11.5 million (Q2 2023) and $12.4 million (YTD 2023) from losses in the prior year, primarily due to the absence of $30.6 million impairment charges in Q2 2022[83] Outlook The company focuses on long-term growth through innovation and expansion, prepared to mitigate macroeconomic uncertainties - Long-term growth strategies include product innovation, channel and category expansion, strategic acquisitions, and IT investments[84] - The company acknowledges macroeconomic uncertainties (inflation, rising interest rates) and potential impacts on discretionary spending but is prepared to mitigate pressures[84] Key Factors Affecting Our Financial Condition and Results of Operations Product demand remained healthy, especially in wholesale, with inflation managed through cost control, but volatility is expected - Product demand remained healthy in Q2 2023, with strong growth in the wholesale channel[86] - The company has mitigated inflationary pressures through cost management and strategic repayments of Revolving Credit Facility borrowings[86] - Expects continued volatility from macroeconomic pressures (inflation, rising interest rates) for the remainder of 2023[86] Components of Our Results of Operations This section defines key operational components: Net Sales, Gross Profit, SG&A, Depreciation, Other Operating Expenses, Impairment, Interest, and Income Taxes - Net sales include DTC and wholesale channels, influenced by seasonal demand (DTC highest in Q2/Q4, wholesale in Q1/Q3) and new product launches[88][89] - Cost of goods sold primarily includes purchase cost from manufacturers, inbound freight, duties, and product quality costs[90] - SG&A expenses cover marketing, wages, equity-based compensation, warehousing, logistics, shipping, and professional fees[91] - Other operating expenses include IPO, secondary offering, acquisition-related, business optimization, and management transition costs[93] Results of Operations This section details financial performance comparisons for Q2 and H1 2023 versus 2022, analyzing sales, profit, expenses, and taxes Net Sales Net sales decreased 3.7% for Q2 2023 due to a 14.2% DTC decline, offset by 57.0% wholesale growth Net Sales Performance (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Net sales | $130,927 | $136,019 | $(5,092) | (3.7)% | | Direct-to-consumer net sales | $99,650 | $116,096 | $(16,446) | (14.2)% | | Wholesale net sales | $31,277 | $19,923 | $11,354 | 57.0% | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Net sales | $219,134 | $218,222 | $912 | 0.4% | | Direct-to-consumer net sales | $154,400 | $176,326 | $(21,926) | (12.4)% | | Wholesale net sales | $64,734 | $41,896 | $22,838 | 54.5% | - DTC channel average order value decreased by 23.7% (3 months) and 21.4% (6 months) due to higher demand for lower-priced items and apparel[99][100] Cost of Goods Sold and Gross Profit Cost of goods sold decreased due to lower freight, impacting gross profit by -4.2% for Q2 but +1.4% for H1 Cost of Goods Sold and Gross Profit Performance (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Cost of goods sold | $47,856 | $49,343 | $(1,487) | (3.0)% | | Gross profit | $83,071 | $86,676 | $(3,605) | (4.2)% | | Gross margin | 63.4% | 63.7% | (0.3)% | | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Cost of goods sold | $81,660 | $82,693 | $(1,033) | (1.2)% | | Gross profit | $137,474 | $135,529 | $1,945 | 1.4% | | Gross margin | 62.7% | 62.1% | 0.6% | | - Decrease in cost of goods sold was primarily driven by reductions in container costs for inbound freight[101] Selling, General & Administrative Expenses SG&A expenses decreased by 8.2% for Q2 and 5.8% for H1 2023, driven by reduced marketing and distribution costs SG&A Expenses Performance (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | SG&A expenses | $63,524 | $69,166 | $(5,642) | (8.2)% | | SG&A as a % of net sales | 48.5% | 50.9% | (2.3)% | | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | SG&A expenses | $108,146 | $114,810 | $(6,664) | (5.8)% | | SG&A as a % of net sales | 49.4% | 52.6% | (3.3)% | | - Variable cost decreases for the three months included a $3.0 million reduction in marketing spend and $5.3 million in distribution costs[103] - Fixed cost increases for the six months included $3.4 million in employee costs (equity-based compensation, bonus, severance) and $1.8 million in rent[105] Other Operating Expenses Other operating expenses significantly increased due to higher transaction and acquisition-related costs, partially offset by lower transition costs Other Operating Expenses Performance (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Other operating expenses | $2,132 | $820 | $1,312 | 160.0% | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Other operating expenses | $2,537 | $1,320 | $1,217 | 92.2% | - Increases were driven by $1.0 million (3 months) and $1.1 million (6 months) in transaction-related and acquisition expenses[106] - Partially offset by a $0.5 million decrease in management transition costs[106] Impairment Charges No impairment charges were recorded in Q2 or H1 2023, contrasting with $30.6 million in prior year charges - No impairment charges were recorded during the three and six months ended June 30, 2023[107] - In the prior year (Q2 2022), $30.6 million in impairment charges were recorded, including $27.9 million for goodwill and $2.7 million for trademark intangibles[107] Interest Expense Net interest expense significantly increased by 101.3% for Q2 and 134.9% for H1 2023 due to higher interest rates Interest Expense, Net (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Interest expense, net | $2,490 | $1,237 | $1,253 | 101.3% | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Interest expense, net | $4,776 | $2,033 | $2,743 | 134.9% | - The increase was driven by a higher weighted average interest rate on total debt[107] Income Taxes Income tax expense significantly increased due to the non-recurrence of a prior year discrete tax benefit from impairment charges Income Tax Expense (Benefit) (in thousands) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Income tax expense (benefit) | $2,608 | $(1,819) | $4,427 | (243.4)% | | Metric | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Income tax expense (benefit) | $2,919 | $(2,697) | $5,616 | (208.2)% | - The increase in tax expense was primarily due to the non-recurrence of a discrete tax benefit from $30.6 million impairment charges in the prior year[108] Liquidity and Capital Resources Liquidity is supported by operating cash, $60.6 million cash on hand, and $300.0 million available credit, sufficient for the next year - Cash requirements are primarily for working capital and acquisitions, funded by operating cash flows, cash on hand, and the Revolving Credit Facility[109] Liquidity Sources and Facilities (as of June 30, 2023, in thousands) | Source/Facility | Amount | Availability | | :---------------------- | :----- | :----------- | | Cash and cash equivalents | $60,603 | $60,603 | | Working capital (excluding cash) | $82,856 | $82,856 | | Revolving Credit Facility | $50,000 | $300,000 | | Term Loan | $93,750 | — | - Anticipates sufficient liquidity for the next twelve months, but future growth and acquisitions may require additional capital[115] Revolving Credit Facility and Term Loan The company has a $350.0 million Revolving Credit Facility and a $93.8 million Term Loan, both SOFR-based and covenant-compliant - Revolving Credit Facility: $350.0 million capacity, $50.0 million outstanding (June 30, 2023), matures May 2026, interest based on SOFR[112] - Term Loan: $100.0 million initially, $93.8 million outstanding (June 30, 2023), matures September 2026, interest based on SOFR, used for Chubbies acquisition[113] - The company was in compliance with all required financial covenants as of June 30, 2023[114] Cash Flows Operating cash flow generated $51.8 million for H1 2023, a significant improvement, while investing and financing used cash Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :--------- | :----- | :----- | | Operating activities | $51,795 | $(11,912) | | Investing activities | $(8,887) | $(5,356) | | Financing activities | $(5,785) | $19,012 | - Operating cash flow increase of $63.7 million was due to a $50.9 million decline in cash usage from working capital (e.g., $46.9 million decrease in inventory cash usage) and $12.8 million from improved net income[118][122] - Financing activities used $24.8 million more cash, primarily due to a $28.5 million increase in Class A common stock repurchases[119] Contractual Obligations Contractual obligations are detailed in Notes 1, 8, and 9 of this report and the 2022 Form 10-K Critical Accounting Estimates No material changes were identified in critical accounting policies and estimates during H1 2023 - No material changes to critical accounting policies and estimates were identified during the six months ended June 30, 2023[122] Recent Accounting Pronouncements Details on recent accounting pronouncements are provided in Note 1 of the consolidated financial statements JOBS Act As an 'emerging growth company,' Solo Brands adopts accounting guidance like private companies, potentially affecting comparability - The company qualifies as an 'emerging growth company' under the JOBS Act[124] - Elected to adopt new or revised accounting guidance within the same time periods as private companies, which may impact financial statement comparability[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to interest rate, inflation, commodity price, and foreign currency risks, noting no material impact to date Interest Rate Risk The company faces interest rate risk from variable-rate debt; a 100 basis point SOFR increase would raise annual interest by $1.4 million - Indebtedness of $50.0 million (Revolving Credit Facility) and $93.8 million (Term Loan) bears variable interest rates based on SOFR[126] - A 100 basis point increase in SOFR would increase annual interest expense by approximately $1.4 million[126] - No interest rate swap contracts were in place as of June 30, 2023[126] Inflation Risk Inflation has not materially impacted financials, but future high rates could adversely affect gross margin and SG&A - Inflation has not had a material impact on financial position or results of operations to date[127] - Future high inflation could adversely affect gross margin and SG&A if selling prices do not increase with costs[127] Commodity Price Risk The company's primary raw materials, stainless steel and aluminum, are subject to price fluctuations, but commodity price risk is not material - Primary raw materials are stainless steel and aluminum, which are subject to price fluctuations[128] - No significant direct correlation is believed to exist between petroleum/natural gas prices and product costs[128] Foreign Currency Risk International sales, 6.8% of net sales, are USD-denominated; foreign currency risk is not material, but a strong USD could impact costs - International sales accounted for 6.8% of consolidated net sales for the six months ended June 30, 2023, primarily denominated in U.S. dollars[129] - Exposure to foreign currency fluctuations from operating expenses is not material at this time[129] - A strengthening U.S. dollar could increase product costs for international customers[129] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting Limitations on effectiveness of controls and procedures Controls and procedures provide reasonable assurance, acknowledging inherent limitations and resource constraints - Controls and procedures can only provide reasonable assurance due to inherent limitations and resource constraints[130] Evaluation of disclosure controls and procedures Disclosure controls and procedures were deemed effective at a reasonable assurance level as of June 30, 2023 - Disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023[131] Changes in Internal Control over Financial Reporting No material changes occurred in internal control over financial reporting during Q2 2023 - No material changes in internal control over financial reporting during the quarter ended June 30, 2023[132] PART II. OTHER INFORMATION Item 1. Legal Proceedings No material changes to legal proceedings have occurred since the 2022 Form 10-K - No material changes to legal proceedings since the 2022 Form 10-K[134] Item 1A. Risk Factors This section highlights existing risk factors and introduces a new risk regarding stock repurchases, including potential volatility and excise tax - No material changes to risk factors identified in the 2022 Form 10-K, except for a new risk concerning stock repurchases[136] - Stock repurchases could increase stock price volatility, reduce market liquidity, diminish cash reserves, and may not produce hoped-for stockholder value[137][138][139] - The Inflation Reduction Act of 2022 imposes a non-deductible 1% excise tax on stock repurchases exceeding $1 million annually, making them more expensive[140] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities No unregistered equity sales occurred; 5,605,509 Class A common shares were repurchased and retired for $28.0 million in Q2 2023 Unregistered Sale of Equity Securities No unregistered sales of equity securities occurred during Q2 2023 - No unregistered sales of equity securities occurred during the three months ended June 30, 2023[141] Purchase of Equity Securities In May 2023, 5,605,509 Class A common shares were repurchased and retired for $28.0 million Class A Common Stock Repurchases (May 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :------------------------ | :--------------------- | :--------------------------- | | May 1, 2023 - May 31, 2023 | 5,605,509 | $5.00 | - The repurchase was authorized by the Board of Directors and conducted through a privately negotiated transaction[143] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[144] Item 4. Mine Safety Disclosures No mine safety disclosures are reported - No mine safety disclosures[146] Item 5. Other Information No other information is reported, and no Rule 10b5-1 trading arrangements were adopted or terminated - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[147] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, agreements, and certifications - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Stock Purchase Agreements (May 10, 2023, and July 12, 2023), Amendment No. 3 to Credit Agreement, CEO/CFO Certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350), and Inline XBRL documents[149] SIGNATURES Signatures The report was signed on August 3, 2023, by the President and CEO, and the CFO - The report was signed on August 3, 2023, by John Merris (President and CEO) and Somer Webb (CFO)[154]